Family CEOs may be thinking more seriously about retirement as the recent dramatic changes in their lives and businesses continue to unfold. What should be the next step? Is keeping the business in the family the right decision? Does it make more sense to sell to a new owner who has a different, and potentially more futuristic vision; one that could transform the business and expose previously hidden opportunities that are emerging in the New Reality?
The Successful Transgenerational Entrepreneurship Practices (STEP) Project 2019 Global Family Business Survey, planned and developed through a strategic alliance with KPMG Private Enterprise, asked survey participants, pre-COVID-19, about succession planning and their emergency succession plans in case the unexpected should happen. Because the unexpected did happen, follow-up interviews with family business leaders were conducted in the late spring and early summer of 2020 to determine how COVID-19 might have affected their views on succession planning and governance.
Having experienced the direct impact of an unexpected health crisis, some of these family CEOs were directly exposed to the value of having a leadership contingency plan in place. This experience had led them to further consider and accelerate longer-term succession planning to ensure that their businesses will continue to be well-navigated.
Succession planning needs work
The STEP Project 2019 Survey highlighted that the current state of succession planning needs plenty of work. Seven in ten family business CEOs surveyed do not have a succession plan, though 47 percent have a succession emergency plan in case of unexpected events. This distinction suggests that the emergency succession plans might not reflect some CEOs’ current wishes or views on the longer-term path for their companies, though this is likely to change due to a new mindset resulting from COVID-19.
Globally, 45 percent of family business leaders surveyed believe that ownership of the business should stay within the family. However, this doesn’t hold true across every generation. CEOs who are members of the Baby Boomer and Silent Generations are more likely to believe that the next CEO will come from the family than those CEOs from Generation X or Millennial generations. There are also interesting regional variations: the STEP Project 2019 Survey shows that the number of CEOs who believe their business will continue to be led by the family increased to 55 percent in the Asia/Pacific and Middle East/Africa regions, and decreased to 33 percent in North America. In Canada, a 2018 survey1 showed that only 31 percent of small business owners planned for a family succession.
How to choose the next leader?
To better understand the thought processes of those family CEOs who believe that a family member should succeed them, the STEP Project 2019 Survey asked questions about how they would choose their successor. Nearly half (48 percent) said it would depend on the potential leader’s level of interest in the business, while 23 percent said they would choose the family member with the best qualifications. Globally, only 12 percent said they would choose the first-born son, although this number is higher in regions with a stronger tradition of primogeniture, primarily the Middle East and Africa (18 percent) and Asia and the Pacific (21 percent). Other options included leaving the decision in the hands of the board (11 percent) and putting the decision in the hands of an external search firm (1 percent). Overall, the responses clearly show that global family business CEOs value self-commitment and competence above all when selecting the next leader.
The STEP Project 2019 Survey also revealed interesting insights about the differing paths that family succession might take. Not surprisingly, the most popular was linear succession, with 46 percent of family CEOs favoring transfer between a member of the current (parent) generation and a member of the next (child) generation. Other options included intra-generational succession, passing the business on to a CEO from their own generation (26 percent); discontinuous succession, skipping a generation and handing leadership on to the next (23 percent); and reverse succession, where the CEO from a younger generation is succeeded by a CEO from an older generation (5 percent).
There are generational distinctions here as well. Intra-generational succession was most common among business leaders from the Silent Generation, for example, while Baby Boomer and Generation X leaders experienced mostly linear successions. Interestingly, the majority of Millennial leaders achieved their role through a discontinuous succession.
Looking beyond the family
Sometimes the best succession plan means making a different choice, such as bringing in an outsider to run the company or selling the company outright. This course of action requires careful planning2 , not just to ensure a good price, but to set the company up with the best chance of continued success in a new incarnation. This is often becomes particularly important to ensure that the essence of the brand , survives, especially if it is tightly linked to the founder and the family. Family business CEOs who choose to sell their company don’t take this path lightly. However, many family businesses that are sold or merged with others may ultimately become more successful and be further along the path toward building greater family wealth.
In the end, family businesses must put succession plans in place, and do so sooner rather than later to anticipate what might lie ahead and succeed in our New Reality. As new generations enter the business, their priorities and vision will undoubtedly shift in order to take their companies forward. Selecting the next CEO based on criteria such as commitment and competence, and having an updated emergency succession plan in place, are all necessary steps for navigating through this journey.
In-depth interviews with family business leaders across the globe provided us with firsthand and profound perspectives on their succession plans and the factors affecting the performance of their family businesses. I encourage you to read their stories in a series of articles co-authored with the STEP Project Global Consortium to be published on the KPMG Private Enterprise website in October.
With the need to prioritize a succession or governance strategy, the KPMG Private Enterprise Family Business Dynamics Assessment can help. This complimentary online assessment is dedicated to helping family-owned businesses like yours evaluate key opportunities and issues commonly identified by business families globally and can be used as part of your strategic planning as you chart a new course into the New Reality.